N Brown faces £9m VAT recovery challenge

Fashion group N Brown, which owns the Simply Be and JD Williams brands, faces paying up to £9m in additional VAT from 2020, after the company was told by a First Tier Tribunal (FTT) it is likely to lose its long-running dispute with HMRC

N Brown has consistently contended that as its marketing expenditure principally relates to the sale of goods (which is VAT standard-rated), rather than the provision of financial services (VAT exempt), it is entitled to recover VAT on the vast majority of these costs. 

HMRC has argued that as these marketing costs relate to both to the sale of goods and financial services, a substantially higher portion of VAT is non-recoverable.

The case was heard at an FTT in May 2018 and related to the period 2006-2016.  In a regulatory statement, the company said it has now received a draft decision, which it is currently assessing in detail.  It is anticipated that the ruling will be issued in final form shortly, pending detailed liaison with both the tribunal and HMRC on its contents.

N Brown said the draft ruling ‘has mixed implications and we are disappointed by the current outcome’. 

The case has two key aspects, those being attribution and apportionment. With respect to attribution, the judge agreed with HMRC, finding that when the group is marketing goods it is also in effect marketing financial services, even if there is no reference to this in its marketing materials.

However, the judge ruled against HMRC and directed that in apportioning costs via a turnover ratio, vatable product turnover should be included in full, but VAT exempt financial services income should in part be excluded to the extent that it did not relate to the original marketing activities.

In its statement the company noted: ‘While the financial implications of this ruling for N Brown remain uncertain pending its ultimate outcome, the group expects that irrecoverable VAT on its marketing costs will increase by between £6m to £9m per annum on a full-year basis from FY20, with a proportionately lower impact anticipated for FY19.’

N Brown also said it is considering whether to make an appeal on the decision. Currently, the company says it will continue to work with HMRC to agree, on a reasonable basis, an apportionment. It is anticipated that further announcements on this matter will be made in due course.

Report by Pat Sweet

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